Critical Accounting Policies

Note 1 to the Company's consolidated financial statements (included in Item 8 of
the Form 10-K for the year ended December 31, 2007) lists significant accounting policies used in the development and presentation of its financial statements and there were no significant changes at September 30, 2008. This discussion and analysis, the significant accounting policies, and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of the Company and its results of operations.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, other than temporary impairment losses on available for sale securities, goodwill impairment, and the valuation of deferred tax assets. In estimating other-than temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Results of Operations

OVERVIEW

Included in the operating results for the nine and three months ended September 30, 2008, were pretax other than temporary impairment ("OTTI") charges of approximately $6.8 million relating to perpetual preferred stock associated with the federal takeover of Fannie Mae and Freddie Mac. Also included in the operating results for the nine and three months ended September 30, 2008, were pretax OTTI charges associated with the Company's equity holdings of $141,000 in Fannie Mae common stock and $104,000 in Wachovia Corporation common stock. As a result of the current financial market turmoil fueled by the ongoing credit crisis, the Federal Reserve approved the Wachovia Corporation merger with Wells Fargo & Company on October 12, 2008. The total amount of pretax OTTI charges relating to the Company's equity holdings included in the operating results for the nine and three months ended September 30, 2008, were approximately $7.1 million.

Under section 301 of the Emergency Economic Stabilization Act of 2008 ("EESA"), signed into law on October 3, 2008, the capital loss resulting from the $6.8 million Fannie Mae and Freddie Mac perpetual preferred stock charged to earnings for the nine and three months ended September 30, 2008 can be treated as an ordinary loss. The ordinary loss treatment will allow the Company to recapture a tax benefit of approximately $2.3 million. Due to technical provisions within the accounting pronouncements governing the timing of the tax treatment of the ordinary loss, the Company will recognize the tax benefit of $2.3 million in the fourth quarter of 2008.

For the quarter ended September 30, 2008, the Company had a net loss of $4.61 million, a decrease of 281.8%, as compared to net income of $2.54 million for the same period in 2007. For the first nine months of 2008, the Company had a net loss of $1.58 million, a decrease of 129.1%, as compared to net income of $5.44 million for the same period in 2007. Basic and diluted earnings per share for the third quarter of 2008 were ($0.81) compared to basic and diluted earnings per share of $0.45 for the same period of 2007. For the nine months ended September 30, 2008, basic and diluted earnings per share were ($0.28) as compared to basic and diluted earnings per share of $0.95 for the same period of 2007. The net loss for the nine months ended September 30, 2008 resulted primarily from the OTTI charges of $6.8 million on Fannie Mae and Freddie Mac perpetual preferred stock in the third quarter of 2008. Included in the operating results for the first nine months of 2008 were pretax re-branding costs of approximately $595,000 associated with the Company's name change to VIST Financial Corp. and additional expense charged to the provision for loan losses (see provision for loan loss allowance discussion).

The following are the key ratios for the Company as of:

                                          Three Months Ended                Nine Months Ended
                                    September 30,    September 30,    September 30,    September 30,
                                        2008             2007             2008             2007

Return on average assets                    -1.53 %           0.94 %          -0.18 %           0.69 %
Return on average shareholders'
equity                                     -17.89 %           9.66 %          -1.99 %           7.00 %
Dividend payout ratio                        0.00 %          44.44 %        -142.86 %          60.00 %
Average shareholders' equity to
average assets                               8.55 %           9.69 %           9.12 %           9.82 %

Net Interest Income

Net interest income is a primary source of revenue for the Company. Net interest income results from the difference between the interest and fees earned on loans and investments and the interest paid on deposits to customers and other non-deposit sources of funds, such as repurchase agreements and short and long-term borrowed funds. Net interest margin is the difference between the gross (tax-effected) yield on earning assets and the cost of interest bearing funds as a percentage of earning assets. All discussion of net interest margin is on a fully taxable equivalent basis (FTE).

Net interest income before the provision for loan losses for the three months ended September 30, 2008 was $9.1 million, an increase of $0.6 million, or 7.4%, compared to the $8.5 million reported for the same period in 2007. Net interest income before the provision for loan losses for the nine months ended September 30, 2008 was $26.7 million, an increase of $1.7 million, or 6.8%, compared to the $25.0 million reported for the same period in 2007. The net interest

margin decreased to 3.44% for the third quarter of 2008 from 3.57% for the same period in 2007. The net interest margin decreased to 3.51% for the first nine months of 2008 from 3.63% for the same period in 2007.

The following summarizes net interest margin information:

                                             Three months ended September 30,
                                       2008                                    2007
                                       Interest                               Interest
                         Average       Income/         %         Average      Income/         %
                         Balance       Expense        Rate       Balance      Expense        Rate
                                              (Dollar amounts in thousands)
Interest-Earning
Assets:
Loans: (1) (2)
Commercial             $   704,869    $   11,249        6.24    $ 625,661    $   12,004        7.51
Mortgage                    46,446           721        6.21       44,006           716        6.50
Consumer                   130,445         2,091        6.38      126,123         2,414        7.59
Investments (2)            211,430         3,056        5.78      175,267         2,513        5.73
Other short-term
investments                    287             1        1.95          482             6        4.59

Total
interest-earning
assets                 $ 1,093,477    $   17,118        6.13    $ 971,539    $   17,653        7.11

Interest-Bearing
Liabilities:
Transaction
accounts               $   333,736    $    1,514        1.81    $ 329,621    $    2,480        2.99
Certificates of
deposit                    339,363         3,492        4.09      336,480         4,106        4.84
Securities sold
under agreement to
repurchase                 125,678         1,168        3.70       94,964           985        4.07
Short-term
borrowings                  95,337           559        2.29       58,292           762        5.11
Long-term
borrowings                  60,000           607        3.96       11,109           100        3.51
Junior subordinated
debt                        20,159           331        6.53       20,360           470        9.17
Total
interest-bearing
liabilities                974,273         7,671        3.13      850,826         8,903        4.15
Noninterest-bearing
deposits                   110,903             -                  108,999             -
Total cost of funds    $ 1,085,176         7,671        2.81    $ 959,825         8,903        3.68

Net interest margin
(fully taxable
equivalent)                           $    9,447        3.44                 $    8,750        3.57

(2) Interest income on loans and investments is presented on a taxable equivalent basis using an effective tax rate of 34%.

                                             Nine Months Ended September 30,
                                       2008                                    2007
                                       Interest                               Interest
                         Average       Income/         %         Average      Income/         %
                         Balance       Expense        Rate       Balance      Expense        Rate
                                              (Dollar amounts in thousands)
Interest-Earning
Assets:
Loans: (1) (2)
Commercial             $   678,831    $   33,489        6.48    $ 609,761    $   35,258        7.63
Mortgage                    46,624         2,242        6.41       44,169         2,130        6.43
Consumer                   128,200         6,348        6.61      128,919         7,399        7.68
Investments (2)            206,736         8,914        5.75      170,005         7,094        5.56
Other short-term
investments                    385            10        3.46          711            24        4.51

Total
interest-earning
assets                 $ 1,060,776    $   51,003        6.32    $ 953,565    $   51,905        7.18

Interest-Bearing
Liabilities:
Transaction
accounts               $   325,675    $    4,847        1.99    $ 310,765    $    6,801        2.93
Certificates of
deposit                    329,898        10,677        4.32      327,873        11,795        4.81
Securities sold
under agreement to
repurchase                 120,266         3,016        3.35       93,827         2,924        4.11
Short-term
borrowings                  84,510         1,709        2.66       66,927         2,676        5.27
Long-term
borrowings                  59,799         1,810        3.98       15,189           399        3.46
Junior subordinated
debt                        20,142         1,082        7.18       20,282         1,419        9.35
Total
interest-bearing
liabilities                940,290        23,141        3.29      834,863        26,014        4.17
Noninterest-bearing
deposits                   106,994             -                  106,966             -

Total cost of funds    $ 1,047,284        23,141        2.96    $ 941,829        26,014        3.69

Net interest margin
(fully taxable
equivalent)                           $   27,862        3.51                 $   25,891        3.63

Average interest-earning assets for the three months ended September 30, 2008 were $1.09 billion, a $121.9 million, or 12.5%, increase over average interest-earning assets of $971.5 million for the same period in 2007. Average interest-earning assets for the nine months ended September 30, 2008 were $1.06 billion, a $107.2 million, or 11.2%, increase over average interest-earning assets of $953.6 million for the same period in 2007. The yield on average interest-earning assets decreased by 98 basis points to 6.13% for the third quarter of 2008, compared to 7.11% for the same period in 2007. The yield on average interest-earning assets decreased by 86 basis points to 6.32% for the first nine months of 2008, compared to 7.18% for the same period in 2007.

Average interest-bearing liabilities for the three months ended September 30, 2008 were $974.3 million, a $123.4 million, or 14.5%, increase over average interest-bearing liabilities of $850.8 million for the same period in 2007. Average interest-bearing liabilities for the nine months ended September 30, 2008 were $940.3 million, a $105.4 million, or 12.6%, increase over average interest-bearing liabilities of $834.9 million for the same period in 2007. In addition, average non-interest-bearing deposits increased to $110.9 million for the three months ended September 30, 2008, from $109.0 million for the same time period of 2007. Average non-interest-bearing deposits remained the same at $107.0 million for the nine months ended September 30,2008 and for the same time period of 2007. The average interest rate on total non interest-bearing and interest-bearing liabilities decreased by 102 basis points to 3.13% for the three months ended September 30, 2008, compared to 4.15% for the same period in 2007. The average interest rate paid on total interest-bearing liabilities decreased by 88 basis points to 3.29% for the nine months ended September 30, 2008, compared to 4.17% for the same period in 2007.

For the three months ended September 30, 2008, net interest income before the provision for loan losses increased 7.4% to $9.1 million compared to $8.5 million for the same period in 2007. For the nine months ended September 30, 2008, net interest income before the provision for loan losses increased 6.8% to $26.7 million compared to $25.0 million for the same period in 2007.

For the nine months ended September 30, 2008, total interest income decreased 2.3% to $49.9 million compared to $51.1 million for the same period in 2007. The decrease in total interest income for the nine months ended September 30, 2008 was primarily the result of a decrease in earning asset yields compared to the same period in 2007. Average earning assets increased due mainly to an increase in average commercial loans outstanding and available for sale investment

securities. Average commercial loans increased by $69.1 million, or 11.3% from September 30, 2007 to September 30, 2008. Additionally, average total investment securities increased by $36.4 million or 21.3% from September 30, 2007 to September 30, 2008. Earning asset yields on average outstanding loans decreased due mainly to a decrease in the targeted short-term interest rate, as established by the Federal Reserve Bank ("FRB"), which resulted in a decrease in the prime rate from 7.75% at September 30, 2007 to 5.00% at September 30, 2008. Earning asset yields on investment securities increased from 5.56% at September 30, 2007 to 5.75% at September 30, 2008. In March 2007, the Company restructured the investment portfolio by selling approximately $64.1 million of available for sale investment securities and reinvesting the proceeds into higher yielding available for sale investment securities.

For the nine months ended September 30, 2008, total interest expense decreased 11.0% to $23.1 million compared to $26.0 million for the same period in 2007. The decrease in total interest expense for the nine months ended September 30, 2008 resulted primarily from a decrease in average rates paid on interest-bearing deposits, short term borrowings and securities sold under agreements to repurchase compared to the same period in 2007. The average rate paid on interest-bearing liabilities decreased from 4.17% at September 30, 2007 to 3.29% at September 30, 2008. Total cost of funds decreased from 3.69% in 2007 to 2.96% in 2008. The decrease in interest-bearing deposit rates was the result of management's disciplined approach to deposit pricing in response to the decrease in short-term interest rates. Average interest bearing deposits increased $16.9 million or 2.7% from September 30, 2007 to September 30, 2008 due primarily to growth in core deposits. The average rate paid on short term borrowings and securities sold under agreements to repurchase decreased from 5.03% at September 30, 2007 to 2.60% at September 30, 2008. The decrease in short term borrowings and securities sold under agreements to repurchase rates was the result of decreases in targeted short term interest rates. Average short term borrowings and securities sold under agreements to repurchase increased $44.0 million or 27.4% from September 30, 2007 to September 30, 2008 due primarily to the funding of growth in commercial loans and available for sale investment securities.

Provision for Loan Losses

The provision for loan losses for the three months ended September 30, 2008 was $525,000 compared to $300,000 for the same period of 2007. The provision for loan losses for the nine months ended September 30, 2008 was $2,585,000 compared to $598,000 for the same period of 2007. The increase in the provision is due primarily to an increase in outstanding loans and the result of management's evaluation and classification of the credit quality of the loan portfolio utilizing a qualitative and quantitative internal loan review process, including provisions for specific loans. At September 30, 2008, total non-performing loans were $11.4 million or 1.3% of total loans compared to $6.6 million or 0.8% of total loans at December 31, 2007. The $4.9 million increase in non-performing loans was due primarily to three commercial real estate loans totaling approximately $4.2 million. Net charge-offs to average loans was 0.29% annualized for the nine months ended September 30, 2008 compared to 0.17% for the year ended December 31, 2007. The provision reflects the amount deemed appropriate by management to provide an adequate reserve to meet the present risk characteristics of the loan portfolio. The ratio of the allowance for loan losses to loans outstanding at September 30, 2008 and December 31, 2007 was 0.92% and 0.88%, respectively. Please see further discussion under the caption "Allowance for Loan Losses."

Other Income

Total other income for the three months ended September 30, 2008 totaled ($2.0) million, a decrease of $7.2 million, or 139.5%, from other income of $5.2 million for the same period in 2007. Total other income for the nine months ended September 30, 2008 totaled $7.3 million, a decrease of $5.3 million, or 41.8%, from other income of $12.6 million for the same period in 2007. The decrease in other income for the three and nine month periods ended September 30, 2008 as compared to the same periods last year is due primarily to OTTI charges relating to certain equity holdings discussed below.

Net securities losses were $7.0 million for the three months ended September 30, 2008. There were $85,000 net securities gains for the same period in 2007. Net securities losses were $6.8 million for the nine months ended September 30, 2008 compared to net securities losses of $2.4 million for the same period in 2007. Net securities losses for the nine and three months ended September 30, 2008, were primarily due to the OTTI charges of approximately $6.8 million in perpetual preferred stock associated with the federal takeover of Fannie Mae and Freddie Mac, government sponsored enterprises ("GSE's"), placed into conservatorship on September 7, 2008, by the Federal Housing Finance Agency and the United States Department of Treasury ("Treasury"). Net securities losses for the nine months ended September 30, 2007 were primarily due to the sale of $64.1 million in lower-yielding available for sale securities as part of a balance sheet restructuring completed in the first quarter of 2007.

One of the Company's primary sources of other revenue is commissions and other revenue generated primarily through sales of insurance products through VIST Insurance, LLC. Revenues from insurance operations totaled $3.1 million for the third quarter of 2008 a 2.8% increase from the $3.0 million for the same period in 2007. Revenues from insurance operations totaled $8.5 million for the nine months ended September 30, 2008 a 1.7% decrease from the $8.7 million for the same period in 2007. The increase in revenues from insurance operations for the third quarter is attributed mainly to an increase in commission income on group insurance products and the nine month decrease in revenues from insurance operations is mainly attributed to a decrease in contingency income on insurance products offered through VIST Insurance, a wholly owned subsidiary of the Company. On September 4, 2008, the Company acquired Fisher Benefits Consulting for $1.75 million, a firm specializing in employee group benefits, which will operate as part of VIST Insurance, LLC.

Revenue from mortgage banking activities decreased by $287,000, or 66.4%, from $432,000 for the third quarter of 2007 to $145,000 for the third quarter of 2008. Revenue from mortgage banking activities decreased by $714,000, or 46.9%, from $1.5 million for the nine months ended September 30, 2007 to $810,000 for the nine months ended September 30, 2008. The decrease in revenue from mortgage banking activities for the comparative three and nine month periods is primarily due to a decline in the volume of loans sold into the secondary mortgage market. The Company operates its mortgage banking activities through VIST Mortgage, a division of VIST Bank.

Revenue from brokerage and investment advisory commissions and fees decreased 1.6% in the third quarter of 2008 compared to the same period of 2007, from $189,000 to $186,000. Revenue from brokerage and investment advisory commissions and fees decreased slightly from $651,000 to $650,000, or 0.2%, for the nine months ended September 30, 2008 compared to the same period of 2007. The decrease in revenue from brokerage and investment advisory commissions and fees for the comparative three month period is due primarily to a decrease in investment advisory service activity offered through VIST Capital Management, a wholly owned subsidiary of the Company.

Customer service fees increased 34.5% for the third quarter of 2008 as compared to the same period in 2007, to $893,000 from $664,000. Customer service fees increased 9.8% for the nine months ended September 30, 2008 as compared to the same period in 2007, to $2.2 million from $2.0 million. The increase in customer service fees for the comparative three and nine month periods is primarily due to a increase in commercial account analysis fees and non-sufficient funds transactions.

For the three months ended September 30, 2008, earnings on investment in life insurance increased to $171,000 from $161,000, or 6.2%, for the same period in 2007. For the nine months ended September 30, 2008, earnings on investment in life insurance increased to $503,000 from $487,000, or 3.3%, for the same period in 2007. The increase in earnings on investment in life insurance for the comparative three and nine month periods is due primarily to increased earnings credited on the Company's bank owned life insurance.

For the three months ended September 30, 2008, other income including gain on sale of loans decreased to $511,000 from $666,000, or 23.3%, for the same period in 2007. For the nine months ended September 30, 2008, other income including gain on sale of loans decreased to $1.4 million from $1.7 million, or 13.9%, for the same period in 2007. The decrease in other income including gain on sale of loans for the comparative three and nine month periods is due primarily to a decrease in merchant commission income and a declining volume of SBA loans sold.

Other Expense

Total other expense for the three months ended September 30, 2008 equaled $10.6 million, an increase of $571,000, or 5.7%, over total other expense of $10.0 million for the same period in 2007. Total other expense for the nine months ended September 30, 2008 equaled $32.2 million, an increase of $1.8 million, or 6.0%, over total other expense of $30.3 million for the same period in 2007.

Salaries and benefits expense for the third quarter of 2008 was $5.4 million compared to $5.2 million for the same period in 2007. Salaries and benefits expense for the nine months ended September 30, 2008 rose slightly to $16.5 million compared to $16.2 million for the same period in 2007. Included in salaries and benefits expense for the three months ended September 30, 2008 and 2007 were pre tax stock-based compensation costs of $86,000 and $69,000, respectively. Included in salaries and benefits expense for the nine months ended September 30, 2008 and September 30, 2007 were pre tax stock-based compensation costs of $257,000 and $190,000, respectively. Included in salaries and

benefits expense are total commissions paid on mortgage origination activity through VIST Mortgage, investment advisory activity through VIST Capital Management and insurance activity through VIST Insurance, LLC of $1.3 million for the nine months ended September 30, 2008 compared to $1.2 million for the same period in 2007. Included in salaries and benefits expense for the nine months ended September 30, 2008 are severance costs of approximately $51,000 relating to the outsourcing of the Company's internal audit function and staff reductions in the mortgage banking operation. Full-time equivalent (FTE) employees decreased to 294 at September 30, 2008 from 316 at September 30, 2007.

Occupancy expense and furniture and equipment expense for the third quarter of 2008 increased 0.8% to $1.75 million compared to $1.73 million for the same period in 2007. Occupancy expense and furniture and equipment expense for the nine months ended September 30, 2008 increased 2.3% to $5.3 million compared to $5.2 million for the same period in 2007. The increase in occupancy expense and furniture and equipment expense for the comparative three and nine month periods, is due primarily to an increase in building lease expense, equipment repairs and software maintenance expense.

Professional services expense for the third quarter of 2008 increased 61.2% to $719,000 compared to $446,000 for the same period in 2007. Professional services expense for the nine months ended September 30, 2008 increased 49.9% to $1.8 million compared to $1.2 million for same period in 2007. The increase in professional services expense for the comparative three and nine month periods is due primarily to increases in legal fees associated with the Company's name change to VIST Financial Corp. and other general Company business associated with the outsourcing of the internal audit function.

Outside processing expense for the third quarter of 2008 increased 4.8% to $827,000 compared to $789,000 for the same period in 2007. Outside processing expense for the nine months ended September 30, 2008 increased 2.7% to $2.5 million compared to $2.4 million from the same period in 2007. The increase for . . .